Crude oil shocks and stock markets : A panel threshold cointegration approach

a r t i c l e i n f o JEL classification: C23 E44 Q43 Keywords: Crude oil shocks Stock market prices Panel data Asymmetric adjustment Granger causality This paper proposes a panel threshold cointegration approach to investigate the relationship between crude oil shocks and stock markets for the OECD and non-OECD panel from January 1995 to December 2009. Nonlinear cointegration is confirmed for the oil–stock nexus in the panel. Because threshold cointegration is found, the threshold vector error correction models can be run to investigate the presence of asymmetric dynamic adjustment. The Granger causality tests demonstrate the existence of bidirectional long-run Granger causality between crude oil shocks and stock markets for these OECD and non-OECD countries. However, the short-run Granger causality between them is bidirectional under positive changes in the deviation and unidirectional under negative ones. Moreover, the speed of adjustment toward equilibrium is faster under negative changes in the deviation than that under positive ones in these OECD and non-OECD countries. Hamilton (1983) indicates that crude oil price shocks were a factor in the US recession after World War II. Since then, the identification of connections between crude oil prices and the macroeconomy has been a major concern in theory and practice. A large amount of literature tries to shed light on the effects of crude oil price shocks on economic activities, such as aggregate demand, inflation, employment and real economic growth (Bachmeier, 2008; Cunado and Perez de Garcia, 2005; Hamilton, 2003). The aforementioned studies have yielded mixed results. However, in the empirical literature, only a relatively small number of works have looked into the effects of crude oil prices on the stock markets. Studies by Jones and Kaul (1996) and Sadorsky (1999) report a significant negative impact of crude oil shocks on stock returns, a result that is further supported by Papapetrou (2001). According to the latter paper, an oil price shock has a negative effect on stock returns for the first 4 months. In this line of research, however, Chen et al. (1986) and Huang et al. (1996) do not reach the same conclusions. All of these results show that there is no consensus on the relationship between crude oil shocks and stock markets; therefore, more research may be necessary on this subject. Much of the literature thus far has focused on the connection between crude oil price changes and stock prices. Specifically, almost all …